Deadline Fast Approaching to Reap the One-Time Permanent Tax Benefits of NOL’s and Their Viability in 2017 and Future

July 2018

By Grant Keppel

Before the Tax Cuts and Jobs Act (TCJA) went into effect, a business’s net operating losses (NOLs) could generally be carried back two years and carried forward 20 years to offset taxable income. Tax reform, however, repealed the two-year carryback allowance and other special carryback provisions for losses arising in tax years beginning after December 31, 2017. The TCJA also placed limits on the use of NOLs. Starting in tax year 2018, businesses may no longer use NOLs to offset all of their taxable income in subsequent tax years. The NOL deduction is now limited to 80 percent of taxable income. In other words, business owners may no longer use NOLs to reduce tax liability to zero.

Any NOL carryforwards must be applied in the first subsequent tax year in which the business has positive taxable income and may now be carried forward indefinitely rather than limited to a 20-year period.

Restaurant Example: Why is this important?
Let’s look at the restaurant example used in our previous tax depreciation article. A restaurant operator owns 50 free-standing restaurants, holds all its real estate in a C corporation, and has an assumption of taxable income of $4,000,000 before performing a cost segregation study. If the company performs a cost segregation study before the extended due date of October 15, the additional depreciation of $11,000,000 would create a NOL in 2017 of $7,000,000, which they would be able to carry back to 2015 and/or 2016 to offset any income and receive a refund for those years, if taxable income existed. Furthermore, the company would be able to use the remaining loss in subsequent years without limitations. To the extent the company had paid taxes in 2015 and 2016, the impact on their refund would be higher with corporate tax rates as high as 35 percent during those years.

If the company waited to do the cost segregation study for tax year 2018 (assuming a similar taxable income of $4,000,000 in 2018), the same $7,000,000 NOL would be limited to 80 percent or $5,600,000 with no ability to carryback those losses. In effect, the company would permanently lose $1,400,000 in NOL deduction or $490,000 in tax cash flow by not taking advantage of this benefit in the 2017 tax year. Furthermore, the existing NOL would be deflated by the same income tax rate arbitrage of 14 percent, or $784,000 of permanent tax cash flow loss, if the company does not take advantage of the added deductions, NOL usage and tax rate differential in 2017 versus 2018.

Act Now to Meet October 15 Deadline
Timing is of the utmost importance for companies who have not filed their 2017 income tax returns and are extended to the October 15 deadline. Depending on the number of locations and size of the company’s portfolio of real estate assets, the average duration of a professionally completed cost segregation study is between 30 to 60 days.